Benefits Leader Reins In 401(k)s

International Business Machines Corp.IBM0.64%, a bellwether for employee benefits, is overhauling its retirement program to contribute once a year to employee 401(k) accounts in a lump-sum payment.

Starting next year, IBM's contributions, which generally range from 6% to 10% of pay, will take place Dec. 31. Workers who leave the company before Dec. 15 won't qualify for the match, unless they retire.

ENLARGE

IBM's switch is the latest in a series of moves big companies have been making to rein in retirement-plan expenses in recent years—and the financial implications for employees could be significant.

Many U.S. companies cut their 401(k) match in 2009 during the economic slowdown, and some of them have only partially restored it. In 2011, 7% of employers made no contributions at all to their plans, up from 2% in 2001, according to benefits consultant AonAON-1.15% Hewitt.

Benefits experts say IBM's shift could start a trend among other large employers. Earlier this year Ford Motor Co.F-1.79% said it would offer retirees a lump-sum payout to offset its pension obligations. General Motors Co.GM-1.25% and about a dozen other companies quickly followed suit, according to the Pension Rights Center, a Washington, D.C., advocacy group.

For IBM, the latest move could help save millions of dollars a year in compensation expenses, and keep valued workers who want to ensure they receive the match more tethered to their jobs—at least until the end of a given year.

In 2011, it paid $875 million in matching and automatic contributions.

The change "reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment," IBM spokesman Douglas Shelton said in a statement.

Financial planners say the lump-sum contributions undermine one big advantage of 401(k) plans: "dollar-cost averaging," in which investors are buying stock and bonds at multiple prices over time, leveling out risk and return. It is a particular concern for older workers who are closer to retirement and have less time to make up for short-term losses, said Jason Chepenik, a certified financial planner and retirement-plan consultant in Winter Park, Fla.

Some IBM employees are unhappy.

"It's a huge change," said Andy Maher, a 59-year-old IBM customer engineer in Victorville, Calif. Mr. Maher, who started at the company in 1976, was an early adopter in the company's retirement offerings, eventually increasing his savings to 12% of pretax pay while raising five children.

Now, he said, he is concerned that "you lose a whole year's worth of interest on that money. And if they lay you off Dec. 1, you don't get anything. It adds a whole other level of unnecessary uncertainty."

All told, about 9% of employers pay out their 401(k) match once a year, according to Aon Hewitt. But most of those employers have older plans that never switched to regular matches, said Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt.

What is more, annual matches frequently are tied to a company's profits, with workers getting a larger percentage when a company does well and less when business wanes, said Brigitte Madrian, a professor of public policy and corporate management at Harvard University's Kennedy School of Government.

Ms. Madrian added that Labor Department and U.S. Treasury officials "could be very interested in [IBM's move] and if they're concerned about it, they could say, 'You can't do that.' " She said the agencies could devise rules precluding IBM and other companies from depriving employees who leave before a set date of their matching contributions.

For now, the risk for employees in 401(k) plans is that other companies will follow IBM's lead.

IBM, of Armonk, N.Y., fully replaced its traditional pension with its 401(k) program in 2008, and was praised for designing a plan with low fees, access to financial planners and generous company contributions.

When companies are looking for ways to cut the cost of their benefits, shifting to an annual match is often an idea that consultants suggest, though it is "unusual for a company to make this move," Ms. Borland said.

"When a large organization like IBM makes the change, others are going to watch and see, and if they're struggling with the same issues from a cost-pressure perspective, and they are, it wouldn't surprise me if other companies followed suit," she added.

In focus groups, Charles Schwab Corp.SCHW-0.88% has found that 401(k) participants view the match as the "canary in the coal mine," said Dave Gray, Schwab's vice president of 401(k) client experience.

As long as the employer maintains the match, "they view that as the company is fiscally sound," he said. "When they don't see a match, employees question what this said about the company—but they don't view it differently depending on when it was deposited."

Even so, employees should keep socking away their savings in such plans, Mr. Chepenik said. "As a participant, you have to worry about yourself. Fund as much as you can on your own and start to minimize your reliance on a company match. … At the end of the day, saving for retirement is our responsibility, not the company's responsibility."

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